By attacking Google Search, the EU throws Europe’s smartphone users under the bus

Paul MacDonnell is Executive Director of the Global Digital Foundation

The European Commission’s decision to fine Google €4.3bn over its Android mobile operating system is based on two arguments: first, Google’s bundling of its search function into its free suite of Android mobile apps, Google Mobile Services (GMS), prevents competition from other search engines on mobile devices, and second, by insisting that phone manufacturers who wish to install its mobile services do not “fork” Android, that is change it into new versions that prevent its apps from working, Google prevents such forked systems from competing with its own version of Android. Aside from the obvious circularity of this argument, there is no evidence that either of these accusations is true and more than enough to show that they are groundless.

Take the issue of bundling Google’s mobile apps into GMS: if Google insisted that all competing apps were kept off smartphones where GMS is running, then there would be an excellent case against the company. If it were technically difficult for consumers to install competing apps onto smartphones then, again, the case would have more cogency.

If there ever was a ‘common sense test,’ the Commission’s case would not pass the first hurdle

The precedent is the Commission’s 2004 decision against Microsoft concerning the pre-installation of Windows Media Player onto the Windows operating system. Back then, installing competing software was – for most consumers – difficult and time-consuming. But today the average Android phone user is happy to download 50 apps, a number of which compete successfully against Google.

Then there is the Commission’s assertion that by requiring manufacturers not to fork Android so that Google’s apps stop working on it, Google is harming competition – which is the opposite of the truth. Google’s condition that device manufacturers do not render Android incompatible with GMS has the effect of stabilising and, just as importantly, standardising Android as an open source platform in a way that actually encourages a rich and broad app-developer ecosystem. This helps all apps, including those designed by Google’s competitors, to work right across all Android phones. No arguments have been offered to support the contention that seeking to promote a broadly standardised Android prevents competition against Google. If Google modified Android so that its own apps worked best and competing apps did not work properly, then that would be anti-competitive. But that is not what Google has done in this case.

The real problem is not the treatment of Google; it is the fact that the Commission’s decision tramples all over Europe’s complex market for smartphones, smartphone apps and smartphone network services for the sole purpose of taking aim at Google’s overall dominance in search. But this is a dominance that is neither a source of market power nor of significant profits for Google within the mobile sector.

In order to initiate a conflict against this dominance in search, the Commission has had to gerrymander into existence markets that no one has ever heard of. Thus, the Commission has said that Google is abusing markets for “general internet search services”, “licensable smart mobile operating systems”, and “app stores for the Android mobile operating system”.

If there ever was a ‘common sense test,’ the Commission’s case would not pass the first hurdle: does anyone doubt that the real markets in the mobile sector are the markets for smartphones and smartphone network contracts?

The real problem is not the treatment of Google; it is the fact that the Commission’s decision tramples all over Europe’s complex market

Some salient facts about this market, included in an extended analysis I wrote in 2016, state that, in 2015, Apple earned 92% of all its operating income from smartphone sales based on a 20% market share. Samsung, in turn, made 15%. The two companies accounted for more than 100% of industry profits because other manufacturers – almost exclusively those of Android smartphones – broke even or made losses. In comparison, Google earned $3bn in revenue from Android search in 2014. Apple made almost eleven times this amount from iPhone sales in the last quarter of 2015 alone. In 2016, the GSMA, the mobile carriers trade association, reported that the global revenue of mobile carriers exceeded $1tn – more than 300 times Google’s revenue from mobile search in 2015. In Europe, smartphone subscribers account for a sizeable slice of the mobile market with an estimated 78% of all Europeans having a mobile subscription and an estimated smartphone penetration amongst these of 76%.

The opportunity for Android OS to transform the market for smartphones and smartphone network contracts is that cheap, high-quality smartphones can be brought to consumers. A significant obstacle to this is that nearly all EU countries constitute separately regulated mobile oligopolies. In seeking to prevent incompatible forking of Android, Google is fighting against the inertia and indifference of companies who are incentivised to preserve a hierarchy that places manifestly inferior Android products at the bottom, with iPhone, Google Pixel and Samsung at the top. Upselling is the name of the game, and Europe’s mobile operators have no incentive to take steps to improve consumers’ experience with cheap high-quality phones.

As it steps forward to land a punch on the chin of Google search, the sound of something breaking under the Commission’s feet is Android’s disintegrating potential to disrupt the status quo that is Europe’s non-competitive and fragmented smartphone market.